Queen's Speech

My Lords, I shall miss my noble friend Lord Myners and the noble Baroness, Lady Noakes, but I welcome the new team, whom I have known for a long time and shall have fun attacking. Unlike many of my noble friends, I have always taken the view that the deficit has to be tackled and, along with 19 other economists, signed a letter to the Sunday Times to that effect. The noble Lord, Lord Skidelsky, then found an army of many more economists to demolish my case, but we shall see. The important point is that we should debate the timing of deficit reduction, not the need for it. Even on timing, the choice is not as wide as people think. We are in the midst of a recovery. Growth in the last quarter of last year and the first quarter of this year was fragile, but the figures have been revised upwards. We will most likely have a growth rate of around 1.5 per cent to 2 per cent this year. When the right honourable gentleman the Chancellor of the Exchequer announces his emergency Budget, it is important that he ensures that the path of deficit reduction is properly laid down without any confusion and that he makes it contingent on a certain growth trajectory. When the Office for Budget Responsibility checks the growth figures, I hope that it will follow the practice of the Bank of England and produce a range of likely growth figures, because we need to think about the uncertainty surrounding those figures and then look at the timescale of deficit reduction. I produced a paper before the election with Peter Kenway of the New Policy Institute in which we calculated the rate at which the deficit would have to be reduced to bring down the share of spending from its present high figure of 44 per cent of GDP to, say, 40 per cent, which is what it was in 2002. The most important element in that calculation is that just keeping real current spending constant—zero growth—and relying on growth to bring in revenue may be a good and cautious strategy to begin with. If even that much is done, it will be good. What people historically call cuts in government spending in the UK are not actual cuts but occur when the growth of current spending is less than the growth of GDP. The growth of GDP will have to be watched carefully; at the minimum, to have constant real spending would be a good strategy. The Liberal Democrat proposals for fair taxation are extremely muddled. The Liberal Democrats are good-hearted people but they have not really thought this through. In order to take about 2 million people earning between £6,500 and £10,000 out of taxation, they are giving another 20 million people more money than they are giving to the people whom they really want to help. People earning above £10,000 will get £700 guaranteed, while people at the lower end of the scale will get somewhere near £700 at most. If you help only the 2 million lower paid, that will cost £1.5 billion, but taking this course would add another £15 billion of cost for those who do not deserve the extra money. That is not fair; it is regressive and expensive. There is a simple way of achieving something better, which is not to raise the personal allowance but to give people who earn between £6,500 and £10,000 a tax rebate. In that way, only those people would get a tax rebate, not the rest. I suggest an even better measure—I have written about this and I hope that it will appear in print very soon—which would be to abolish the personal allowance altogether and convert it into a tax credit. Everybody would get a tax credit equivalent to the basic rate of taxation times the personal allowance, which is £1,300 in today’s figures. The advantage of that is that people who earn less than £6,500 who do not now pay tax would pay negative income tax and get a credit. In that way, you would help the really poor people through the taxation mechanism to a far greater extent than we are doing now. It is a good idea to integrate income and capital gains in a single taxation framework. However, you should do that consistently. I suggest that the 20 per cent and 40 per cent rates be incorporated in the capital gains part of tax as well. The noble Lord, Lord Higgins, decried the fact that the IMF has suggested that the zero rating of VAT be abolished. I proudly say that the IMF has at last seen the sense of what I was saying 17 years ago, for which I was sacked from the Labour Front Bench. That is not a bad lag for the IMF. I wish that the Government would catch up with the IMF and abolish zero VAT rating. If you are to cut the budget deficit and the debt, you have to choose carefully whether it is not better to increase taxation in certain respects rather than to cut spending. It is a fine balance but I have never understood the holy-cow nature of zero rating of VAT on children’s food, which contains far too much sugar and salt. Tax it and we will get a healthy population.